BANKS MISS EASY FIX

Banks miss an easy housing fix

Lenders say they want to help troubled homeowners, but they are delaying deals that could save everyone - including the lenders themselves - a lot of time and money.

By Les Christie, CNNMoney.com staff writer

Last Updated: May 28, 2008: 7:32 AM EDT

NEW YORK (CNNMoney.com) -- Banks say they want to help troubled homeowners, but they are delaying deals that could save everyone - including the lenders themselves - a lot of time and money.
Lenders are taking much longer than necessary to approve short sales, according to Duane LeGate, of House Buyers Network, a short sale specialist.
In a short sale, a homeowner who cannot keep up with their loan asks the lender to take a dollar amount less than what is owed on a home's mortgage, and forgive the remainder of the unpaid debt.
So if a borrower has a mortgage balance of $100,000 and finds a buyer who will pay $95,000 for the house, the lender agrees to accept that $95,000 and close out the loan.
"There was a much greater chance of success with these in the past," said LeGate
Ideally in a short sale, everyone wins. Borrowers avoid the ugly foreclosure process that destroys their credit, while lenders recoup more of their costs than they would by spending the time and money it takes to kick an owner out and resell the property.
Lenders typically lose about 19% of a mortgage's value in a short sale, according to Clayton Holdings, a Conn.-based, provider of loan analytics, while they lose an average of 40% on loans that go into foreclosure.
Coldwell Banker CEO Jim Gillespie agrees that short sales are taking too long to complete. And he speaks from firsthand experience; a short-sale offer he made on a house in Marin County, Calif. in late fall didn't win approval until April.
But most buyers can't, or won't, wait that long."That's been our biggest challenge - keeping the buyers interested long enough as we wait and wait for an answer," said Jeff Morrell, a Colorado Springs real estate agent who specializes in short sales.
Running out the clock
John Fitzmorris, a short-sale expediter in East Stroudsburg, Pa., was working with Robson and Laura Pereira, who were behind on their mortgage, to market their home before a foreclosure would take it away.
"She worked, but he had a construction business that went defunct," said Fitzmorris. "That put them in trouble."
Falling home prices in the area made a normal sale impossible; the couple was upside-down in their mortgage, owing more on the property than it was worth on the current market.
After they fell behind on their payments, Laura Pereira said, "the bank sent me a letter asking me to call for help. I called them four or five times and they never got back to me. We had three [short sale] offers on the house at the time."
Fitzmorris, who has been doing short sales for more than 20 years, contacted the bank about a short sale well before the foreclosure date.
"We sent an authorization letter listing us as the contact for a short sale, a sales agreement, a completed seller's information document as well as listing and marketing information to First American Loss Mitigation, which was handling the Pereira's foreclosure process, on January 24," he said. The buyer was very interested - enough to pay for a title search.
A month later, Fitzmorris sent another complete package, including a sales contract, to the bank and started to call daily for feedback on the short-sale offer.
Greystone didn't respond until March 10, when it said that it had the file and would process it.
But by March 27 the bank still hadn't approved the short sale, and the Pereira's property went to sheriff's sale.(The bank did not respond to several requests for comment.)
"The offer we sent to the bank was $129,500," said Fitzmorris. "But another investor, TM Builders, bought the property at the sheriff's sale for $100,265."
By the time the Pereira's lost their house, they owed a total of $160,000, including principal of $144,500 in addition to late fees, legal fees, and so forth. So in the end, the bank lost $60,000 on the loan, when it could have lost $30,000 by doing a short sale.
Ironically, TM Builders flipped the home to Fitzmorris's buyer for the $129,500 short-sale price, money the bank would have gotten had it acted more quickly.
"The sellers did what they could to mitigate the problem but the bank didn't respond, which hurt both the sellers - with an unnecessary foreclosure permanently impacting their credit - and the bank," said Fitzmorris.
Usual suspect
The difficulty in getting short sales approved stems from the same hurdles facing all the other foreclosure prevention efforts. The fact that the majority of mortgages are pooled and securitized makes it hard to get approval to change the terms of the mortgages.
"It has to do with who owns the loan," said LeGate. "If a mortgage is stuck in a pool somewhere, when something goes wrong, no one knows who the actual owner of the note is."
Additionally, the volume of troubled borrowers makes it hard for lenders to keep up. The housing crisis has put an enormous burden on mortgage servicers, the companies that manage loans for securities investors.
At many servicers, said LeGate, "There's no one really skilled at loss mitigation, and these guys have more work than they were prepared to do."
And with foreclosure filings breaking new records each month, there's no sign that this problem will ease any time soon.
Says Laura Pereira, "I feel the bank really let us down."